Tuesday, February 2, 2010

Exxon powers through in a tough environment (XOM)

Exxon (XOM) shares have risen about 3.5% since they reported earnings yesterday morning. Earnings for 2009 were dramatically lower that 2008. Crude oil prices fell by about a third from the previous year, while natural gas prices fell by over half. EPS of 1.27 beat the consensus estimate by 8cents, and revenues of $89.8billion for the fourth quarter cam in $2.6billion higher than expected.

Natural gas prices have been held down (that's putting it lightly) by non-stop new discoveries. As it becomes more plentiful (per the chart below), the price will stay under pressure. From the EIA:

Looking below, I've highlighted some of the more interesting items impacting Exxon's financial performance. Upstream (searching for and selling oil and natural gas) earnings were destroyed this year, but they could snap back a bit in 2010 on slightly higher oil prices. I have no idea what to expect for natural gas, but an uptick there could also add to upstream profits.

The real wildcard is downstream (refining and marketing). The oil majors are shutting down refining capacity and exiting the retail market in droves (know a few gas stations shutting down?). That business was contributing nearly $10billion in earnings and about $1.80 in earnings per share just a couple years ago. Now it's down to $1.7billion - putting a PE of 10 on that earnings hit of 1.66 wipes out $16 per share, not a trivial amount! While the upstream division should tick higher on increases in oil prices, and chemicals should contribute more as economies recover, the downstream division could be in rough shape over the long term. Many outside (and inside, for that matter) observers are citing 2007 as the peak in gasoline consumption, cautioning that we might NEVER hit those levels again.

So we're left with a 2.4% dividend yield on 2009 numbers, and that will increase going forward. Plugging in some modest numbers gets me to about 6.60 in 2010 earnings per share. I like the stock here, as it seems to be pricing in a pretty depressed level of earnings, and upside is probably bigger than downside. XOM is yet another reason to like the Dow Jones Industrial Average.